As expected, Wednesday and Thursday have proven to be volatile for financial markets following key rate decisions from the world’s central banks.

Both the Federal Reserve and Bank of England voted to keep interest rates at their current levels. For the Fed, this was expected, but until yesterday the BoE had largely been expected to hike once more. The pause for UK rates has seen sterling slump to a six-month low against the dollar $1.2253 and has helped push gold back towards £1,600 per ounce, hitting a peak of £1,574.22 today.

210923 GBP Chart

Gold for the month in GBP is up more than 5% in the past month.

For the BoE, yesterday’s inflation reading came in below expectations and changed the outlook for many analysts. The UK’s CPI fell from 6.8% in July, to 6.7% in August. Although the figure represented only a slight drop, analysts (and even the Chancellor and BoE themselves) had expected a 'blip' upwards, with inflation forecast to climb to 7%.

Core inflation also fell from 6.9% to 6.2% year-on-year. Although the drop was welcome and represented inflation moving in the right direction, it still leaves UK inflation far above the BoE's 2% target and higher than many other nations like China (0.1%), the US (3.7%), and the Eurozone (5.7%).

The pound fell on the figures, as it raised hopes that the BoE had room to pause or hike just once more. Today’s announcement confirmed the most optimistic of these scenarios, with the BoE leaving rates at 5.25%, and saw Sterling fall further still. The decision was far from unanimous however, with four votes to hike narrowly losing out to five in favour of holding.

The UK economy looks fragile, with GDP falling and unemployment rising. Further rate hikes could have tipped the UK into a full-blown recession. With inflation still at 6.7% however, oil prices climbing, and wage growth reaching 8%, more may yet be needed from the BoE to bring inflation down. Today’s decision to pause then could prove to be another error from the Bank who have already been accused of being too slow and too cautious on interest rates, leaving the UK with higher inflation than many other countries.

The Federal Reserve also followed expectations last night with a 'hawkish pause' for the US - leaving rates unchanged for now, but with the potential for a further hike at their next meeting. Gold initially climbed to $1,947.64 before the more hawkish tone from the Fed let markets know that rates may not have peaked yet. The dollar strengthened further as a result and pushed gold back towards $1,920 per ounce.

Gold for the month in GBP is up more than 5% and is approaching £1,600 per ounce for the first time since May. Considering the high interest rates and bond yields, for gold to be holding at current price levels is very positive for the metal. If this does prove to be the peak for UK rates, and the BoE hold again when they next meet in early November, then the pound could face more selling pressure and gold climb higher.

Today’s meeting then has bought the Bank six weeks to gather more data on UK inflation, GDP, unemployment and more. Given how close today’s vote came, another hike can’t be ruled out, but after nearly two years of hikes mortgage holders will certainly breathe a sigh of relief to see borrowing costs not rising even if only briefly.

For gold, the metal is still awaiting the key pivot, the moment when the Fed and the BoE confirm the peak has been reached or could soon be cut. When that happens the dollar and pound will begin to fall further. With the value of gold still holding so close to the all-time high even now, the pivot could certainly propel the metal to new records.